Starting Up

Note: Google was kind enough to invite me to give a short talk at their Zeitgeist conference earlier this week. It was a really interesting conference and I got a chance to meet a lot of people I admire. For my talk, I decided to use material from some of my blog posts over the years that I thought might appeal to a broader audience. Unfortunately, I was still recovering from a nastly cold/flu so I didn’t deliver the talk as well as I’d like. Below is the text.

Today, I wanted to talk about some of the most important lessons I’ve learned over the years from my experiences as an investor and entrepreneur.

My most humbling and educational career experience was when I was starting out in the tech world. I applied to literally hundreds of jobs: low-level VC roles, startup jobs, and various positions at big tech companies. I had an unusual background: I was a philosophy undergrad and a self-taught programmer. I got rejected from every single job I applied to.

The reason this experience was so useful was that it helped me to develop a thick skin. I came to realize that employers weren’t really rejecting me as a person or on my potential – they were rejecting a resume. As the process became depersonalized, I became bolder in my tactics. Eventually, I landed a job that led to my first startup getting funded.

One of the great things about looking for a job is that your payoff is almost entirely a max function – the best of all outcomes – not an average. This is also generally true for lots of activities startups do: raising money, creating partnerships, hiring, marketing and so on.

So, every day – to this day – I make it a point of trying something new and ambitious and getting rejected.

2. Don’t climb the wrong hill

I spend a lot of time trying to recruit people to startups, and I’m surprised how often I see smart, ambitious people who get stuck in fields they don’t like because they sense they are making incremental, day-to-day progress.

I think a good analogy for escaping this trap can be found in computer science, in what are known as hill climbing algorithms. Imagine a landscape with hills of varying heights. You are dropped randomly somewhere on the landscape. How do you find the highest point?

The lure of the current hill is strong. There is a natural human tendency to make the next step an upward one. People fall for a common trap highlighted by behavioral economists: they tend to systematically overvalue near term over long term rewards.

This effect seems to be even stronger in more ambitious people. Their ambition seems to make it hard for them to forgo the nearby upward step.

The lesson from computer science is: meander some in your walk (especially early on), randomly drop yourself into new parts of the terrain, and when you find the highest hill, don’t waste any more time on the current hill no matter how much better the next step up might appear.

3. The next big thing will start out looking like a toy

A majority of the top internet companies a decade ago are barely in existence today. How did this happen? These companies weren’t complacent – they were run by smart executives who were constantly aware that they could lose their lead.

The reason big new things sneak by incumbents is that the next big thing always starts out being dismissed as a toy. This is one of the main insights of Clay Christensen’s “disruptive technology” theory, which has been widely studied but I think is still rarely applied because it is so counter-intuitive to conventional management practices.

Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” their users’ needs. The first telephone could only carry voices a mile or two. The leading incumbent of the time, Western Union, chose not to acquire telephone technology because they didn’t see how it could be useful to businesses and railroads – their best customers. What they failed to anticipate was how rapidly telephone technology and infrastructure would improve. The same was true of how mainframe companies viewed the PC, and how modern telecom companies viewed Skype.

The list of top internet companies in 10 years will look very different than that same list does today. And the new ones on the list will be companies that snuck by the incumbents because people dismissed them as toys.

4. Predicting the future of the Internet is easy: anything it hasn’t yet dramatically transformed, it will.

The Internet has gone through fits and starts – a bubble, a crash, and now a revival. Pundits are speculating that another crash is coming. Regardless of what happens in the near term, what we do know is that every year we will continue to see more and more industries succumb to the transformational power of the Internet.

Thus far the US has led Internet innovation. There are things the US can do to keep this lead, including: exporting the entrepreneurial ethos of Silicon Valley to the rest of the country, and allowing talented people to go where their skills are most needed – for example by changing US immigration policies.

Most importantly, we have too many people pursuing careers in banking, law and consulting. I personally encounter this bias all the time when I go to college campuses to recruit for startups. We need to convince the upcoming generation to innovate and take risks in sectors that have a direct impact on the quality of peoples’ lives.

So my advice is:
1) get rejected more
2) climb the right hill
3) create an amazing toy
4) grow that toy into something big that transforms an important industry

What belongs in common to the most people is accorded the least care: they take thought for their own things above all, and less about things common, or only so much as falls to each individually. – Aristotle *

A major policy goal of capitalist countries in the 20th century was to encourage home ownership. It is widely believed that owners take better care of their homes than renters as they have much more at stake financially. There is also evidence that home owners are happier, healthier, and participate more in civic and political life.

The desire to create an “ownership society” led to some smart policy decisions like the mortgage tax deduction and some bad decisions like hazardously low interest rates that contributed to the housing bubble. Home ownership is a noble goal even if home ownership fueled by excessive debt can be disastrous.

Entrepreneurs figured out a long time ago that the benefits of having equity in your company are similar to the benefits of having equity in your house. Silicon Valley expanded this concept by making it standard to grant equity to non-founder employees. It’s no coincidence that Silicon Valley continues to innovate and create jobs while the rest of the economy is stagnant.

Some people think we are in a startup bubble, and that once the bubble bursts people will run back to the supposed safety of non-startup jobs. I’d prefer to think we are at the beginning of a movement to create a true ownership society, where people own stakes not just in their space but also in their time.

Here’s what I think NYC needs to become a serious, long-term startup hub:

1) Some extremely successful startups. We need PayPals – companies that spin out boatloads of talented entrepreneurs and “smart money” angel investors. Big successes also reinforce the “culture of equity” that is so strong in California – the idea that owning options in a startup is the best path to financial and career success.

2) More web product design talent. This is the scarcest talent of all (more so than engineering). NYC has perhaps the best design community in the world, but most of the designers are trained in non-web design fields (e.g. print design). Most of the good design schools don’t emphasize web product design (some exceptions – e.g. my friend Zach Klein taught an excellent class at the School of Visual Arts last semester on web product design). NYU’s ITP stands out as a program that focuses on the intersection of design and technology (e.g. the Foursquare team went to school there). CMU’s HCI program and MIT’s Media Lab are also great. Other schools need similar programs.

3) More engineers. However, this doesn’t mean we need more engineering schools (although that wouldn’t hurt). Like Silicon Valley, NYC is populated mostly by people who moved here from other places. For the right opportunity, it isn’t hard to convince, say, recent MIT grads to move to NYC. The problem is that NYC startups are basically unknown to students at MIT, CMU, Penn, and even (shockingly) to engineering students at NYU and Columbia (big props to HackNY for trying to fix this). East Coast CS students also view startups as a much riskier path than they actually are. I say this having been at dozens of events with East Coast students over the last year or so talking about startups. I’m constantly amazed that most of the students simply don’t realize startups are a viable option. What we have is primarily a marketing, not a supply, problem.

4) High-speed internet throughout all the “startup areas” of Manhattan (Flatiron, Meat Packing, Soho etc) and Brooklyn (Williamsburg, Dumbo, etc). It’s amazing that we have such a fundamental infrastructure problem in a city as advanced as NYC, but I can’t tell you how many startups I know that struggle to get working high-speed internet access that has solid uptime.

5) More marquee tech companies opening large tech offices here. Google has something like 1500 engineers here. This adds a lot of vibrancy to the tech culture and attracts more engineering and design talent to the city.

Some things we don’t need:

1. Government or university organized events that introduce entrepreneurs to other entrepreneurs. There seems to be one such event each week. Entrepreneurs are by nature very good at meeting one another and it’s a small enough community that pretty much everyone already knows each other anyways.

2. Expensive projects like big engineering universities. Again, the more engineers and CS programs in the US the better (even better yet we need more CS majors – which probably means more CS education in high school and earlier), but I can think of far more productive ways to spend $100M to help the NYC startup and tech world.

3. Lower rents. No doubt the rents are too damn high and lower rents would be great. I’ve been living here since college when my room for one year was a hallway in a friend’s apartment. I sympathize with people who say this. But the idea that NYC is unaffordable on a typical startup salary is a complete myth. You can rent a decent place in a cool part of town on a typical startup salary. As to commercial space, for venture-backed startups the difference between rent in NYC and rent in other cities is generally the difference between spending, say, 3% versus 4% of your total financing on rent.

4. More early-stage investment capital. There are plenty of smart angels, seed funds, and VCs who are either based here or are based elsewhere but actively invest here.

Most of all what we need is for our tech and startup scene to reach critical mass (and to sustain that critical mass even if a tech downturn comes). Facebook wasn’t started in Californa and lots of future big successes will be started in all sorts of random places. NYC needs enough tech critical mass that the next Mark Zuckerberg seriously considers relocating to NYC.

When I started grad school in 2001, every student was given an online “classcard”. Classcards were kind of a hybrid of modern-day LinkedIn and Facebook profiles. They were mostly static: no feed or status updates or any other advanced features that we are all accustomed to now. But they were wildly popular. Students spent countless hours browsing them. At one point there was a rumor that people could see who was viewing their classcard and everyone freaked out that their snooping would be revealed. When you met other students you no longer needed to ask for their contact info or background since it was easy to search for their classcard. It completely changed student interactions.

During that time, I was spending most of my personal time trying to develop new startup ideas. I ended up co-founding an online marketing company during school and then after school co-founding other companies (SiteAdvisor, Hunch, Founder Collective). Meanwhile, Facebook – the best internet business of the decade – was being hatched. Its first version looked a lot like classcards, and perhaps it wasn’t a coincidence that it was founded just down the street at the same university. The “toy” I was staring at every day was actually a much better business than all the “serious” ideas I spent so much time working on.

An extremely useful concept that has grown popular among startup founders is what eminent entrepreneur and investor Marc Andreessen calls “product/market fit”, which he defines as “being in a good market with a product that can satisfy that market”. Andreessen argues persuasively that product/market fit is “the only thing that matters for a new startup” and that ”the life of any startup can be divided into two parts: before product/market fit and after product/market fit.”

But it takes time to reach product/market fit. Founders have to choose a market long before they have any idea whether they will reach product/market fit. In my opinion, the best predictor of whether a startup will achieve product/market fit is whether there is what David Lee calls “founder/market fit”. Founder/market fit means the founders have a deep understanding of the market they are entering, and are people who “personify their product, business and ultimately their company.”

A few points about founder/market fit:

Founder/market fit can be developed through experience: No one is born with knowledge of the education market, online advertising, or clean energy technologies. You can learn about these markets by building test projects, working at relevant companies, or simply doing extensive research. I have a friend who decided to work in the magazine industry. He discovered some massive inefficiencies and built a very successful technology company that addressed them. My Founder Collective partners Eric Paley and Micah Rosenbloom spent many months/years becoming experts in the dental industry in order to create a breakthrough dental technology company.

Founder/market fit is frequently overestimated: One way to have a deep understanding of your market is to develop product ideas that solve problems you personally have. This is why Paul Graham says that “the best way to come up with startup ideas is to ask yourself the question: what do you wish someone would make for you?” This is generally an excellent heuristic, but can also lead you astray. It is easy to think that because you like food you can create a better restaurant. It is an entirely different matter to rent and build a space, market your restaurant, manage inventory, inspire your staff, and do all the other difficult things it takes to create a successful restaurant. Similarly, just because you can imagine a website you’d like to use, doesn’t mean you have founder/market fit with the consumer internet market.

Founders need to be brutally honest with themselves. Good entrepreneurs are willing to make long lists of things at which they are have no ability. I have never built a sales team. I don’t manage people well. I have no particular knowledge of what college students today want to do on the internet. I could go on and on about my deficiencies. But hopefully being aware of these things helps me focus on areas where I can make a real contribution and also allows me to recruit people that complement those deficiencies.

Most importantly, founders should realize that a startup is an endeavor that generally lasts many years. You should fit your market not only because you understand it, but because you love it — and will continue to love it as your product and market change over time.